Capital Market Instruments: Shares

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Questions and Answers

What is the primary purpose of issuing shares by a company?

To provide dividends to existing shareholders

To borrow money without repayment obligations

To minimize tax liabilities for the company

To increase their capital and finance operations (correct)

Which types of shares are issued to investors?

Common shares and bonus shares

Equity shares and preference shares (correct)

Convertible shares and preferred shares

Growth shares and revenue shares

What is a bond primarily used for?

To secure short-term loans from other companies

To raise money for capital expenses and projects (correct)

To purchase shares in other companies

To give shareholders ownership in the company

What distinguishes a debenture from other debt instruments?

It must be issued with a fixed return specified Signup and view all the answers

What does a company commit when it issues bonds?

To refund the amount with interest over a set period Signup and view all the answers

What is one of the key advantages of debentures for issuers?

They can raise capital without diluting ownership Signup and view all the answers

Which of the following best describes 'equity shares'?

Shares that provide ownership in a company Signup and view all the answers

What type of bonds typically have lower risks?

Risk-free bonds Signup and view all the answers

What is the primary characteristic of a Fixed Deposit account?

The amount of deposit is fixed for a specified period. Signup and view all the answers

Which of the following entities is primarily a borrower in the money market?

Public Sector Undertakings Signup and view all the answers

What type of financial instrument is issued by the Central Government in the money market?

Treasury Bills Signup and view all the answers

Which participant in the money market typically has a surplus of cash and lends it out?

Insurance Companies Signup and view all the answers

What do Money Market Mutual Fund Schemes primarily invest in?

Money market instruments Signup and view all the answers

Which market do scheduled commercial banks participate in as major borrowers and lenders?

Money Market Signup and view all the answers

Why do Public Sector Undertakings seldom lend their surplus funds?

Their treasury operations are inefficient. Signup and view all the answers

What is the typical risk associated with Treasury Bills issued by the Central Government?

Zero risk Signup and view all the answers

What is the maximum maturity period for Treasury Bills?

1 year Signup and view all the answers

Corporates typically borrow in the money market through which of the following means?

Commercial Paper Signup and view all the answers

Study Notes

Instruments of Capital Market

Shares represent ownership in a corporation and are part of the company’s capital.
Individuals acquiring shares are termed Shareholders.
Companies issue shares in the stock market to raise capital, which must later be refunded from net profits.
Two primary types of shares are available:
- Equity shares offer ownership and voting rights.
- Preference shares provide fixed dividends without voting rights.
Bonds are debt securities issued by banks, organizations, and financial institutions to raise funds from the public.
They come with a commitment to repay the principal with interest within a specified maturity period.
Types of bonds vary by risk and interest rate (e.g., risk-free bonds, high-interest bonds).
Bonds are commonly used to finance capital expenses and projects.
Debentures serve as long-term instruments for borrowing that can be secured against company assets.
They provide fixed returns, allowing holders to know the amount they will receive upon maturity.
Debentures are transferable, enabling holders to sell them before redemption.
Fixed Deposits are bank accounts where the deposited amount is locked in for a specific duration.
Withdrawals are restricted during this period, and closing the account is necessary to access the funds.

Participants in Money Market

Central Government borrows through the issuance of Treasury Bills (T-Bills), which carry no risk and are available in terms of 91, 182, and 364 days.
These T-Bills are primarily purchased by banks and corporations due to their risk-free nature.
Public Sector Undertakings (PSUs) have shares listed on stock exchanges and can issue commercial papers for working capital needs.
PSUs typically act as borrowers rather than lenders due to bureaucratic inefficiencies and cash surplus management issues.
Insurance Companies (both general and life) are generally lenders in the money market because of their cash surplus.
With the advent of CBLO (Collateralized Borrowing and Lending Obligations), they have become substantial investors in this sector.
Mutual Funds provide a range of schemes tailored to various investment goals, including Money Market Mutual Fund Schemes which invest in money market instruments to maintain liquidity.
Banks are significant participants, acting as both borrowers and lenders in multiple markets (call money, short-notice, repo, and reverse repo markets).
Banks borrow from entities like the RBI and IDBI, while also lending via commercial paper and Certificate of Deposits.
Corporates utilize commercial papers as financial instruments to raise short-term capital.

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Description

This quiz explores the concept of shares as a fundamental instrument in capital markets. You'll learn about ownership, shareholder roles, and the process of issuing shares by companies. Test your understanding of how shares contribute to a company's capital and net profit.